Don Kuehn on Why "Structural Adjustment" Takes Place When Unemployment Is Low, Not When Unemployment Is High
DK:
Stimulus and jigsaw puzzles: It's always interesting to hear what people think you think - for example, that Keynesians don't care or worry or realize that market activity is characterized by complex, extended specialized exchange relationships. I don't think this analogy quite works because it only really seems to address the crude Keynesian "lean against the wind" sort of argument that says "I and C are low so we have to increase G to make up the difference". "Lean against the wind" as a simple decision rule isn't the worst thing in the world, so it usually gets by without too much criticism. Better that people think in those terms than that they embrace austerity. But it really misses the primary point.
Keynesians argue that the price distortion occurs in the bust, not the boom. Interest rates are too high, and the Austrians are embracing this distortion of the price mechanism as normal. When you hear Keynesians talk about stimulus, they don't usually talk about how it gives people jobs directly (although if you can do that on worthwhile projects like building roads and schools of course that's nice). When Brad DeLong talks about stimulus, for example, he always refers to its benefit as being the provision of high quality assets for which there is an excess demand. The point is to eliminate the price distortion in the interest rate, so that investors can once again engage in specialization and exchange.
A better analogy for Keynesianism (if we stick to the jigsaw puzzle), is that some shock occurs - someone bumps into the table where you're working on the puzzle - turning a bunch of your pieces upside down. The information that investors were using to make decisions is distorted because you no longer have the picture on the front of the puzzle piece to use to make decisions about the use of that puzzle piece. Whereas previously all puzzle pieces were available for utilization, the shock distorted information such that many of the puzzle pieces aren't viable for use.
What does one normally do in this situation?
Well, you start to correct the distortion! You start turning over puzzle pieces so that the people working on the puzzle can now viably use all of the puzzle pieces that are available. To Keynesians, the Austrians look like they are embracing a price distortion and insisting that the people working on the puzzle continue to use the pieces that have been turned upside down. The Austrians insist that those working on the puzzle will figure out what goes where, even if they no longer have the picture on the front of the piece to look at (information from undistorted prices). Keynesians are simply responding "why don't we turn the piece over and then keep working on the puzzle?", and find it incredible that this idea seems so foreign to people.
